In this episode of Understanding Crypto, James Burtt and Paul Abercrombie demystify the macroeconomic phenomenon of stagflation. It is caused by the convergence of high unemployment, inflation and a recession. They examine the cyclical nature of stagflation and point out parallels between the economic crisis of 1979 and today. They concentrate on the real-world consequences for cryptocurrency owners and entrepreneurs, and encourage listeners to learn more.

The Perfect Storm

Stagflation is "a perfect storm of fiscal activity or fiscal unraveling that occurs at the same moment," Paul says. He notes that high unemployment, negative economic growth, and inflation must all be present for stagflation to occur. The more governments attempt to address one of these issues, the worse the situation becomes. Though national policies are typically designed to prevent one of the three contributors from occurring, this restriction usually has a domino effect on the other two, causing stagflation. “Whilst governments and central banks try to combat inflation by raising interest rates for instance, it has a negative effect,” Paul explains. “It further creates a recession or creates more unemployment in certain areas.” He believes this is currently happening and it’s affecting the crypto market, leading the market to remain stagnant for the next year. The key distinction between inflation and stagflation is that inflation refers to a loss in buying power and stagnation refers to an economic contraction. In essence, Paul claims, there is no stagflation without inflation because both occur at the same time. The real-world implications of stagflation for both business owners and consumers include higher utility, mortgage, and gas expenses. [Listen from: 1:54]

Stagflation and Crypto

This is a new experience for the world of cryptocurrency and can produce negative or minimum growth. If governments choose to raise taxes to combat inflation, people may be forced to liquidate digital assets in order to cover real-world expenses. James clarifies that the 0.5% increase in federal taxes in the United States was one of the key drivers of the Crypto Crash, and any further increases could be disastrous. Paul shows the cyclical nature of this economic phenomenon: the Conservative government increased taxes by 17% in 1979 to battle inflation; current initiatives are following the same tactic. Nonetheless, Paul believes that “crypto itself is robust enough to take a crash and stay as it is.“ [Listen from: 11:09]

Cyclical Stagflation

Both periods - 1979 and today - witness the major variables that encourage stagflation, such as a global energy crisis and a war. Since employment is not at historic lows, the debate over whether we are in stagflation continues. At this juncture, there are both advantages and disadvantages for entrepreneurs, Paul and James point out. They can apply tactics in their companies to enhance income from this vantage point, but during a recession, firms may suffer as a result of the lack of consistent income. This, along with rising energy prices, which would have an impact on business expenses, might be disastrous for the modern entrepreneur. The proactive reaction to the current situation, on the other hand, that the 

Resources

James Burtt on Twitter | LinkedIn | Instagram | Clubhouse

Paul Abercrombie on Website | Twitter | LinkedIn | Instagram 

Key Takeaways 

• Stagflation is caused by the convergence of high unemployment, inflation and a recession.
• Stagflation can have a negative effect on the crypto market.